John Bullis: Home-office deductions don’t automatically trigger audit
March 5, 2013
Several folks have indicated they have a sole-owner business and use a part of their home regularly and exclusively for business use. They have not claimed that deduction because they heard it would cause an IRS audit of their tax return.
Our experience is the deduction is that it’s OK to claim. The IRS has recently even issued a revenue procedure for a “safe harbor” office-in-home deduction. Rev. Proc. 2013-13 offers an optional method of figuring the deduction.
The “safe harbor” is effective for 2013 and later years. It allows $5 per each square foot of the home that is regular and exclusive business use. The limit allowed is 300 square feet; that means a maximum deduction of $1,500.
The home office expenses can be computed the regular way with the percentage of business use (business square feet divided by total square feet). That percentage is then applied to the interest, real estate taxes, utilities, repairs and maintenance as well as depreciation on the business portion of the home. That usually gives a bigger deduction than $1,500.
The home office expenses save both income and self-employment taxes. Sometimes the deduction is only partly allowed in the current year, and the balance is carried over to future years. The limitation is based on business profits, among other things.
The deduction also is available to business owners who don’t own the home, but rent instead. The business-use percentage of the rent paid, utilities, repairs and maintenance is used in that instance.
The election to use the “safe harbor” method is made on the return for each year for 2013 and later years.
It is a good idea to do a sketch of the home and the business-use portions. Taking a few photographs of the business area would help document the deduction.
The IRS does not choose to audit returns just because office-in-home expenses are claimed. The deduction is allowable and should be claimed. Why overpay your taxes?
Be sure to save the information on the expenses claimed on IRS form 8829 – copies of utility bills and proof of payment, etc.
Like most “safe harbor” IRS rules, it might be OK for a few taxpayers beginning in 2013, but figuring the actual costs usually results in greater tax savings. That is true for business vehicle expenses as well as office-in-home deductions.
Did you hear? “The time to win a fight is before it starts” by Frederick W. Lewis.
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.